Standing Committee A

[Mr. Derek Conway in the Chair]

Local Government Bill

Clause 2 - Control of borrowing

Amendment proposed [this day]: No. 26, in 
clause 2, page 1, line 14, at end insert 
 'except where such borrowing is for the purpose of refinancing existing borrowing and the local authority states that repayment of an amount of existing borrowing sufficient to eliminate any such breach is to be made within fourteen days of the date of the borrowing in question.'.—[Mr. Hammond.]
 Question again proposed, That the amendment be made.

Derek Conway: I remind the Committee that with this we are considering the following amendments:
 No. 53, in 
clause 2, page 1, line 15, leave out subsection (2).
 No. 5, in 
clause 2, page 1, line 16, leave out 'direction' and insert 'order'.

Philip Hammond: If the Government have imposed an aggregate limit on local authorities' borrowing to send signals to the market that they are addressing whatever macro-economic crises are occurring, it is important that any breaches of borrowing limits are dealt with in a transparent way. There should be an openness about the reasons for the breaches. It would be dangerous for the Government to be put in the position of issuing directions in the form of letters whizzing out from Whitehall, right, left and centre to the favoured corners of the land. There is a good macro-economic spin reason for ensuring that any arrangements are transparent.
 Given the lingering suspicion about the way in which the Government distribute their largesse among local authorities, it is also important for the Opposition to see clearly the objective bases on which exceptions are established. I see no real objection to consulting Parliament about the matter. There is no reason why an order in the form of a statutory instrument should lead to inordinate delays. If it takes a Department as long to write a letter giving a direction as it often takes to write a parliamentary written answer, the delegated legislation procedure would probably be quicker. 
 The Minister's arguments are not persuasive. There is no obvious reason why such a significant and potentially discriminatory use of power should not be exercised by an order that is subject to parliamentary scrutiny, given that it would be a rare occurrence and that arrangements should be transparent if the limits are to have their effect for macro-economic reasons. 
 In the course of the Minister's remarks, he mentioned a situation in which an authority might have contractual commitments that it was in danger of breaching as a result of the imposition of Government limits. Alarm bells should be ringing in the background about that, because therein might lie a loophole in the mechanism proposed by the Government. If the measure is necessary, it must be robust. I would be worried if the Minister was suggesting that, if a local authority has entered into forward commitments—however irresponsibly—an exception could apply.

Nick Raynsford: I hoped that I had made the distinction clear. Any imposition of a national limit, as the hon. Gentleman recognises, would be in the wider economic interests of the country. In such a situation, it is perfectly possible that the new limit, which could be below the individual local authority's own prudential limit, could cut across existing contractual relations. Such relations may have been entered into responsibly and entirely properly because the authority was satisfied that it would have the ability to repay the loan from revenues that it would receive—it may be well within its prudential limit.
 In such circumstances, if the authority could make a good, strong case, it would seem churlish and unwise not to be able to make an exception. I hope that the hon. Gentleman will acknowledge that such an exception would be made only in good faith, and not to bail out an authority that had acted irresponsibly.

Philip Hammond: In the Minister's example, he would be able, when setting the initial limit on the authority for national economic reasons, to take into account any of the authority's forward commitments. It is therefore not clear to me why he needs the power to make an exception when everything should have been taken into account in setting the limit in the first place.

Edward Davey: Will the hon. Gentleman speculate on whether clause 6 will be overridden by clause 2(2)? Clause 6 provides protection for lenders, who can take their local authority to court. If the Government do not exercise their power under clause 2(2), would the national economic limit imposed by the Government still be overridden by the protection offered to lenders by clause 6?

Philip Hammond: If I understand correctly, the intention behind clause 6 is to ensure that a lender does not have to inquire into the vires of the local authority in making the borrowing in question. The clause has nothing to do with commercial contractual relationships outside borrowing relationships, so I do not think that it applies in the case that the hon. Gentleman raises.
 We have made a perfectly reasonable proposition. We are not suggesting, as the Liberal Democrats have done—although I understand why they have done it—that the power in clause 2(2) should be removed, but that if the power is to remain, it should be exercised by order subject to parliamentary scrutiny. That would be a sensible way for the Government to exercise the power. If the macro-economic considerations of 
 clause 4(1) are to have their proper and desired effect, the process will have to be transparent. 
 Although I do not intend to press the amendment to a Division, I would like to have a separate vote on amendment No. 5. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendment proposed: No. 5, in 
clause 2, page 1, line 16, leave out 'direction' and insert 'order'.—[Mr. Hammond.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 13.

Question accordingly negatived. 
 Question proposed, That the clause stand part of the Bill.

Andrew Turner: I would like to explore an issue that I wanted to discuss in some detail when we were considering one of the amendments, but your predecessor quite rightly ruled the subject to be wide of the amendment, Mr. Conway. However, it is certainly not wide of the clause, as I am sure you will agree. The issue is the aggregation of borrowing limits.
 The Minister explained this morning that one reason why the Mayor of London has power to set the prudential borrowing limits for five local authorities is that he has executive power over them. However, another reason is the aggregation of borrowing that might be imposed on the ratepayers of London if those five local authorities operated independently. I explored to some extent the operation of such a rule in relation to North Tyneside, and the Minister quite reasonably explained that the council and the mayor work together there and set the prudential borrowing limit together. However, there are overlapping jurisdictions in North Tyneside, as there are in many local government areas. There is a police authority and a fire and civil defence authority that overlap the borders of North Tyneside council. 
 In my area, there is one all-purpose authority—or rather, it is practically all-purpose, because there is the ill-named Hampshire police authority, which operates in both Hampshire and the Isle of Wight, and it overlaps the borders of my council. All single-purpose authorities are local authorities for the purposes of the Bill. On the mainland, in Hampshire, outside the unitary authorities of Southampton and Portsmouth, 
 there are district councils, too. Each of those will set prudential borrowing limits independently. However, the only controls over that borrowing are, first, how much the Secretary of State considers that the authority can afford, and secondly, what income stream the local council sets for that authority. 
 In the Minister's response about London, he said that the Mayor's borrowing powers—or his wish and desire to borrow—would be restricted by the income stream set by the assembly; he did not say that the income stream to be set by the assembly would be driven by the obligations of the Mayor. At least in the case of London, one body borrows and another provides the income stream. In most local authorities, one body will set the prudential borrowing limit, decide whether to borrow and set the income stream on which that borrowing will depend. 
 It is important to ask about the direction of the influence. Is the setting of the income stream driven by the desire to borrow, or is the ability to borrow driven by an estimation of the income stream that may be available to fund that borrowing? I guess that, as is generally the case in the world, there is no tidy black and white answer, and that the influence works both ways. However, I am sure that the Minister will admit that borrowing depends on the ability of the local authority to predict an income stream that is sufficient to maintain that borrowing prudentially. I suspect that that is what is meant in clause 3 by the words, 
''ensuring that the authority does not borrow more than it can afford.''
 The authority can afford what its income stream will support. 
 If there are overlapping jurisdictions, the judgment about what can be afforded may depend on the level of the income stream that is set by other authorities. For example, the Hampshire police authority might want to borrow a hell of a lot of money to improve all the police stations and the control system throughout the Isle of Wight, and it might raise the precept accordingly to ensure that its borrowing can be met without taking account—it does not need to take account—of the income stream that the Isle of Wight council, and all the town and parish councils, might be setting for their purposes. Those purposes may be to permit those bodies to borrow as they are permitted by law. 
 Whether an authority can afford to borrow is one question, but whether the ratepayers can afford it is an entirely different, and I suspect a more important question with which the Bill does not wholly deal. How does the Minister propose that two, three or four authorities operating in the same area shall individually set their own prudential borrowing powers, when they would not know how much another authority may be setting, which one takes priority and what income streams might be set? The Bill does not even attempt to deal with that. 
 It is admirable that we are asking local authorities to set prudential borrowing limits and we all agree, more or less, that it would be excellent if the 
 Government did not interfere unduly with the setting of those borrowing limits. It is, however, incumbent on us to explain, as the hon. Member for Kingston and Surbiton (Mr. Davey) came close to doing in his nirvana of councils being able to go bankrupt, that the responsibility for meeting the costs of the borrowing, which may have been prudential in the eyes of one party but highly imprudent in the eyes of another, will rest with the council tax payers for many years to come. We need to trumpet that loudly, so that the council tax payers are in no doubt that they are making a choice. One of the intentions behind the Bill is that council tax payers and electors should be clearer about the choices that they are making when they vote in local elections. We should ensure that that excellent intention is carried through. 
 Earlier on, we talked about the hon. Gentleman having to borrow money to replace the furniture in this Room that, in his enthusiasm for clause 1, he had destroyed. You may not be aware of that, Mr. Conway, but it was an important part of our consideration of clause 1.

Derek Conway: I am glad that I was not involved.

Andrew Turner: That would be fine for the hon. Gentleman, because he cannot walk away from his debts. However, councillors can, and all too frequently do, walk away from the decisions that they have taken on behalf of their electors. They could easily do that and not seek re-election. Sometimes, the electors are given the opportunity to elect them and choose not to. I do not entirely blame the councillors for that. I blame those councillors who set Hackney, for example, on an appalling track and decided not to seek re-election. I would be concerned about councillors who set high prudential borrowing requirements because that seemed, in their political judgment, to be the right thing to do. I do not decry their judgment, but it may differ from that of other councillors. However, I am concerned that having made such a decision and having found that the level of council tax is pushed ever higher, councillors might decide not to seek re-election and walk away from the responsibility, leaving it to other councillors, whether from the same or different parties.

John Pugh: Regarding financial impropriety, I do not think that a councillor's liability in legal terms would disappear if they had been advised by the finance officer to behave properly and not to act in such a way. They might be able to get out of the political flak, but if they do not seek re-election their responsibilities persist in legal terms, even in such a scenario.

Andrew Turner: The hon. Gentleman is right, but I am talking about financial imprudence, not financial impropriety, which may be a matter of judgment between councillors from different parties. For example, my local authority, which is Liberal Democrat-led, was advised by the chief executive that they were in grave danger of making a loss when they ran a pop concert in the middle of last year. The councillors decided that they were going to make a profit and, lo and behold, they made a loss of £380,000, which worked out at £8 per household on
 the council tax. It is possible for councils to act legally and stupidly at the same time.

Patrick Hall: That is what elections are for.

Andrew Turner: It is indeed what elections are for, and they are fine for dealing with councils that act stupidly in setting the revenue stream. However, councillors may place an obligation on future councillors, who may be of a different party—a party that is more sensible than the Liberal Democrats, such as the Labour party or my party. If councillors set high borrowing levels—and do so within the law but in a manner that the hon. Gentleman and I may consider imprudent—they will require future councillors to have a high income stream to meet those debts. In other words, a burden will be placed on future generations.
 I do not say that that is wrong, but I do say that it is stupid. We ought to make it clear to electors—and hon. Members may be sure that I will do so in future local government elections—that if they elect a high-spending, high-borrowing council this year, they will face a high council tax bill not only this year and for four years to come but perhaps for a generation to come.

Philip Hammond: This may be a good moment for a time check. So far, we have spent about 140 minutes on the first two clauses. We are rather behind our schedule: the programme resolution allows us only 12 minutes for each clause. I suspect that we will still require a few minutes to finish clause 2. However, I do not think that anybody would argue that this morning's debates have not been important. [Interruption.] Perhaps not all hon. Members were here for those debates. I accept that we have explored areas of general importance to this first part of the Bill, but I am concerned about the time that it has taken.
 Let us take stock of where we are. Clause 1 puts into primary legislation a specific power to borrow for local authorities. Clause 2 then puts restrictions on that power. First, and quite properly, it refers to the self-imposed restrictions that councils will face as a result of the determinations that they make under clause 3. Secondly, and much more controversially, it refers to the externally imposed limits that councils will face as a result of Government action—Secretary of State action—under clause 4. Several hon. Members have questioned the extent to which the Government's much-vaunted granting of freedoms to local authorities is genuine. Already we see that what is granted in clause 1 is clawed back in clauses 2, 3 and 4. Perhaps more importantly, several hon. Members have stressed that, ultimately, the ability to borrow and to set a prudential borrowing limit depends on the stream of revenue funding that is available to a local authority. That remains very much in the iron grip of the Minister of State. I think that we are supposed to pretend that it is in the grip of the Deputy Prime Minister but we have all seen the firm way in which the Minister of State manages these affairs. 
 We have overarching concerns about this part of the Bill, but we have a specific concern about clause 2(2) and the Secretary of State's ability to exempt any 
 authority from any limit that is imposed on it under clause 4. We have been told that that will not involve any parliamentary scrutiny: it will simply be a determination made by the Minister, issued in the form of a letter. That causes us concern. We have seen bias in funding and we must now be concerned about bias in exceptions to borrowing restrictions. 
 The prohibition on borrowing in foreign currency may not seem controversial—local authorities have always been prevented from doing that. However, that is not a good enough reason for the inclusion of that prohibition in the Bill. I would like to think that the Government have reviewed afresh every restriction faced by local authorities. 
 Perhaps there are good reasons for such a prohibition, but many borrowers whose revenue streams are derived in sterling may consider foreign currency borrowings with suitable hedging tools in place to protect them from currency exposure. What evaluation has the Minister's Department undertaken of any benefits that might have accrued to local authorities from removing the prohibition? I do not suggest that many local authorities would wish to borrow in foreign currencies or that it would be appropriate. However, Conservative Members' starting position is that we should not restrict the powers available to local authorities unless it is essential. 
 The onus of proof lies with the Minister. He must show, beyond reasonable doubt or at least on the balance of probabilities, that the power to borrow in foreign currencies would be wholly a bad thing. If the Government are setting their face against foreign currencies and all that they stand for, is that a portent of decisions yet to come? Perhaps we have detected a shaft of light illuminating future intentions through a chink in the Government's armour. I await the Minister's comments with bated breath.

Edward Davey: I welcome you to the Chair, Mr. Conway. I will not explain my earlier alleged vandalism, but I confessed to the policeman and he will rectify matters.
 Although we have debated this subject exhaustively, there is one aspect that I wish to draw to the Committee's attention. It is pertinent to future debates and answers an earlier question by the hon. Member for Isle of Wight (Mr. Turner). 
 In a letter to you, Mr. Conway and your co-Chairman, Mr. Griffiths, dated 15 January, the Minister kindly set out the background to some of the clauses that we are debating. In the commentary, it states that there will be an opportunity for account to be taken in the code that the Chartered Institute of Public Finance and Accountancy will produce of any views expressed by the Committee and of any changes in the draft legislation. The commentary states that we are invited to comment on the code. The Government want CIPFA to take account of our discussions. We can still influence the way in which the code is developed by CIPFA and its implications for councils throughout the country. 
 The hon. Member for Isle of Wight may be pleased to know that in the draft code, which is work in progress, paragraph 27, on page 14 states: 
''Affordability is ultimately determined by judgement about acceptable Council Tax levels and, in the case of the Housing Revenue Account, acceptable rent levels.''
 Paragraph 29 lists the different matters that should be considered in respect of affordability. 
 I agree with some of the hon. Gentleman's comments. When it examines the code and final drafts before publication, CIPFA may wish to consider his point about council tax levels and precepts, which, taken together, might affect affordability. I do not wish to say much more than that because—we hope—the House will influence the important code in the debates that follow. We want the code, CIPFA's role and that of other accounting bodies put into the Bill. If we want control of borrowing to happen in the true prudential way, the Committee must influence CIPFA to change its current draft of its code.

Robert Syms: We are debating capital finance, which inevitably has a strong relationship with the revenue budgets. I have scanned through some of the documents and want to know where the private finance initiative falls into the equation. We do not count it as capital, but it is a long-term liability. I am interested in how that is accounted for in the financial indicators that must be produced by local authorities. It will have a big impact on the capital and revenue.
 If local authorities felt that the Government, at some point, would intervene to control their local borrowing, they might think that it would be better to go along with the PFI and reduce their borrowing, but have higher revenue costs as a consequence. I want the Minister to put on the record the Government's view of the long-term liabilities of PFI that local authorities have and how that would relate to the financial indicators that we are expected to show, so that we decide whether money can be afforded.

Nick Raynsford: I welcome you to the Committee, Mr. Conway. It started off in an extraordinary fashion this morning in your absence, with an act of vandalism by the hon. Member for Kingston and Surbiton. He told the Committee that he has reported the matter to the police. I sincerely hope that he will be able to attend future sittings and will not be detained.
 We have been making good progress, and I am glad that we are now considering the completion of clause 2. I wish first to deal with the provisions of the clause and then the specific issues raised by the hon. Members for Isle of Wight, for Runnymede and Weybridge (Mr. Hammond), for Kingston and Surbiton and for Poole (Mr. Syms). The Bill scraps credit approvals entirely. It is a major deregulatory measure and allows local authorities to borrow without the Government's consent, provided that they can afford to service the debt. That does not mean that borrowing can ever be unlimited. 
 The theme of the Bill is prudent borrowing. Clause 3, which we shall discuss soon, requires each authority to work out for itself what it can afford to 
 borrow. Having done that, the authority is bound by clause 2(1)(a) not to borrow more than that affordable amount. It is true that clause 2, in conjunction with clause 3, results in control, but that is not control by the Government. The constraint arises from the simple, common-sense rule that authorities should not borrow more than they have decided that they can afford. That represents a genuine new freedom for local authorities. 
 The Bill must strike a balance between such freedom and safeguards for national and local taxpayers. That is why clause 4 contains a reserve power for the Government to intervene and set limits on borrowing. The limits can be imposed for all authorities, if that is necessary in the national economic interest. As I said earlier, we do not anticipate that that will occur in the foreseeable future while the economy is being prudently managed by the Chancellor. However, in the event of there being a misfortune in the long and distant future, it would be helpful for the Government to make such powers available. A limit can also be set for an individual authority to prevent it from borrowing imprudently. Again, we do not foresee such powers being used widely, but only as a last resort. They are a necessary safeguard against irresponsible and imprudent activity by one or more local authorities, which could result in an unfortunate consequence for their council tax payers.

Philip Hammond: The Minister referred to the possibility of imposing limits on an individual authority that is proposing to borrow imprudently. Can he confirm that ''imprudently'' should be defined by reference to the CIPFA code, and not in some other arbitrary way that the Secretary of State may determine?

Nick Raynsford: As the hon. Gentleman knows, we attach considerable importance to developing the code. We have worked closely with CIPFA and have the highest regard for it, and we are confident that the code will set out the proper considerations that should be taken by local authorities setting borrowing limits.
 Of course, it is always possible that there will be circumstances that have not been anticipated. In the 1980s and early 1990s, when the hon. Gentleman's party was in power, the Government made a series of measures to control local authority expenditure. They were considerable acts of centralisation, but the Government justified the measures because local authorities were developing a series of creative accountancy devices to get around capital controls. He should recognise that the Government must have some flexibility to cope with unforeseen circumstances. 
 Although we certainly expect the CIPFA code to be at the core of the provision, we do not, as we have already argued, believe that it should be the only way in which control can be exercised. That is why the Bill provides for regulations to be made by the Government. I have given an idea of how we intend to keep an overview and a discipline, when that is necessary, but we expect to use the powers in very exceptional circumstances only. 
 If we were to set limits under clause 4, authorities would have a duty to comply with those limits under clause 2(1)(b). Clause 2(2) enables the Secretary of State to disapply a national borrowing limit, if one is in place, for an authority in the sort of circumstances that I outlined earlier. I emphasise that we envisage the power being used only in the most exceptional circumstances. The provision is a flexible response, welcomed by the Local Government Association, that will make possible the rectification of a situation that would otherwise be extremely difficult for an authority to manage. It is precisely because the power would need to be exercised quickly that we believe that that should be done by direction rather than by the more complex process of making an order. 
 I shall digress briefly and discuss the role of the Secretary of State—and, indeed, the term ''Secretary of State''. The hon. Member for Runnymede and Weybridge made play about that; however, the issue goes wider than he anticipated. Part 1 applies to both England and Wales, with a few minor exceptions that I shall mention in due course. References to the Secretary of State in part 1 also serve as references to the National Assembly for Wales, and I shall be using the expression in exactly that sense in my remarks on part 1. I hope that that helps to clarify the issue.

Philip Hammond: As a matter of interest, and to tax the depths of the Minister's study of the background to the Bill, why is the term ''appropriate person'' used in other parts of the Bill to deal with the England versus Wales issue if, in part 1, ''Secretary of State'' is used?

Nick Raynsford: I congratulate the hon. Gentleman on his extremely sharp perception of the different language used in part 1 and the other parts. I asked the same question a little while ago, and I can tell him that the difference reflects the use of two separate parliamentary counsels in drafting the Bill. I raised the question of whether consistency was desirable, and I am assured that although it might be desirable, it is not absolutely essential, so we can proceed with those different terms. It is only right that I should make that clear to the Committee.
 Clause 2(3) provides that authorities may not borrow in currencies other than sterling without Treasury consent. The Bill allows authorities considerable freedom as to the manner in which they borrow and the sources from which they obtain loans. As for very many years, authorities will be able to borrow from the Government through the Public Works Loan Board. They will also be free to borrow from private sector banks and financial institutions. In addition, authorities will be able to raise finance in the money markets by issuing bonds and other instruments. We are perfectly happy for local authorities to borrow from foreign institutions, many of which have well-established branches in the UK. 
 We expect authorities to base their choice of lender solely on best value grounds, but there is normally no reason for authorities to borrow other than in sterling, and to do so may be imprudent. That is simply because borrowing in foreign currencies would expose authorities to exchange rate risks.

Philip Hammond: Might.

Nick Raynsford: Yes, I am not saying that it will, but that it might. If there was an adverse movement in the value of a foreign currency against the pound, an authority could find itself owing far more than it had borrowed: that is not a justified risk, given the considerable opportunities for borrowing that are already available to local authorities.
 There is not any wider political implication in that provision, and if the UK were to join the euro—after a referendum—all legislative references to sterling, including this one, would have to be replaced by references to the euro. I hope that that does not cause apoplexy among Opposition Members. The issue of Europe has already come up, and we have only reached the second clause. The Liberal Democrat party, as well as Government Members, will probably soon be running a book on how long it takes in any Committee before the issue of Europe comes up, but on this occasion I will merely note when it has come up and move on.

Philip Hammond: The Minister might like to know that my party's book is on when the Government will have the courage of their convictions and call the referendum that they keep delaying.

Nick Raynsford: As the hon. Gentleman knows, we will call it when the economic tests have been considered and the circumstances are right for our country to seek to join the euro.
 Once the Bill is enacted, the only effective borrowing power available to local authorities will be that in clause 1. However, clause 2(4) is a technical safeguard to ensure that the controls in the Bill apply to borrowing under any other powers that may still exist. I have now covered all the provisions, so I will address the specific points raised by hon. Members. 
 The hon. Member for Isle of Wight started his contribution by referring to the ill-named Hampshire police authority. I think that I understand the purpose of his argument: he is unhappy because, although that authority covers the Isle of Wight, that is not acknowledged in its name. However, his local authority made representations to me only a few days ago: it was seeking to be joined to Hampshire for the purposes of the area cost adjustment. I acknowledge that a Liberal Democrat councillor made those representations, but the hon. Gentleman rightly and properly accompanied his local authority and supported—I think—its case. It is important to recognise that sometimes it is wise to work together with wider entities. 
 The hon. Gentleman referred to decisions by other authorities potentially impacting through a precept. Where a precept applies, an authority will be aware of that before it sets its council tax: that is how it should organise its affairs, so that its own budget cannot be put into a parlous position by the decisions of others. The key point about the prudential limit is that it needs to be exercised by whoever sets the budget for the authority. The only exception to that is the Greater London Authority—we have discussed the specific circumstances of that authority.

Andrew Turner: I appreciate the Minister's answer, but I am sure that he will accept that the precepted authority is not influenced merely through the precept. It is also influenced through the prudential borrowing limit set by the precepting authority, and the consequences for that in any given year, and what may be prudent for a single-tier, all-purpose authority may be imprudent for an authority that is part of a number of authorities that levy a council tax from the same set of ratepayers.

Nick Raynsford: I do not entirely follow the hon. Gentleman's argument, because the one impact that a separate authority can make on the individual local authority is through the precept. If it sets its borrowing limit, and that is not adequately covered, that is a problem for that authority. It comes to be a problem for the relevant local authority only when the precept is presented, and that is presented before the budget. That is an opportunity for the authority to consider that before it sets its own budget. That is why I said that I do not understand why it can be put in a position in which it cannot meet its budget because of another authority's action.

Andrew Turner: May I try to give an illustration? It is one thing if a single-tier authority decides that it can afford to borrow £100 million and the consequence on the precept is £5 million or £10 million a year. However, if the authority, which is single-tier for most purposes, has another authority for which it might be prudent to set a £100 million borrowing limit and if both authorities set such equally prudent borrowing limits for the individual authorities, the impact on council tax payers would be £10 million a year plus their share of that from the larger authority. That clearly has a different impact on affordability for the council tax payer. Does that not also affect the prudence of setting the borrowing limits?

Nick Raynsford: Let us assume that we are talking about a police authority, as the hon. Gentleman raised that matter. The police authority sets its budget and must set its prudential borrowing limit as part of the process. There are precepts on the local authority, and the precept is the one interface between the two that the authority must consider. Any other consequences of borrowing decisions made by the police authority are entirely a matter for the police authority, not the local authority. Local people might rightly take a dim view of a police authority that budgeted imprudently and subsequently had to present a larger precept than might appear sensible. The main local authority's interface with the other body will be the precept—there will be no other mechanism. That is why the prudential limit will not necessarily impact on such a case.
 The hon. Member for Poole raised the issue of the private finance initiative. It will be addressed in the prudential codes and will be the subject of a substantial debate that we will reach shortly. I urge him to be patient, because we will set out definitional matters that will apply to PFI in detail. 
 I hope that I have dealt with all the issues raised and that the Committee will agree that the clause should stand part of the Bill. 
 Question put and agreed to. 
 Clause 2, as amended, ordered to stand part of the Bill.

Clause 3 - Duty to determine affordable borrowing limit

Amendment made: No. 12, in 
clause 3, page 2, line 7, at end insert— 
 '(1A) In the case of the following authorities, namely— 
 (a) the Greater London Authority, and 
 (b) a functional body, 
 the Mayor shall determine and keep under review how much money the authority can afford to borrow. 
 (1B) Before making any determination under subsection (1A), the Mayor shall consult the London Assembly. 
 (1C) Before making a determination under subsection (1A) for a functional body, the Mayor shall consult that body.'.—[Mr. Raynsford.]

Philip Hammond: I beg to move amendment No. 27, in
clause 3, page 2, line 8, leave out from 'provision' to 'requiring' in line 21.

Derek Conway: With this it will be convenient to discuss amendment No. 55, in
clause 3, page 2, line 18, leave out from beginning to end of line 20.

Philip Hammond: The amendment would effectively remove subsections (2) and (3). That would remove the Secretary of State's power to provide by regulations the way in which a local authority performs its duty under subsection (1) and would remove all sorts of mechanistic controls in subsection (3) on how a local authority executes the duty imposed on it by subsection (1).
 We have already seen the draft regulations and, as expected, they specify that the CIPFA code shall be had regard to under subsection (4). The rest of the provisions are unnecessarily prescriptive and meddlesome and relate to things in which the Government should not be involved. Provided that the CIPFA code is properly drafted—I have no reason to suppose that it will not be—it will be sufficient that local authorities shall direct themselves with regard to the guidance in discharging their duty under the relevant subsection. It seems to us that nothing else is necessary. 
 The clause would substantively be reduced to subsections (1) and (4). That is adequate for the purpose and anything further would be indicative of the Government's institutional reluctance to let go. That is perhaps not surprising. Anyone who has ever dealt with a Government or any large organisation will not be surprised that there is an institutional instinct against letting go any power that might one day, perhaps in some obscure and arcane circumstance, be mildly useful or convenient. 
 If the Government are going to be true to their word in trying to make local authorities freer, they must start with a clean sheet. Similarly, the Minister 
 must justify every line of a Bill that imposes a restriction on the freedom of local authorities to act. Some restrictions are necessary, but these are not. The Bill was put out for pre-legislative scrutiny, although that process was not very lengthy. Indeed, some people have said that the Chairmen of some Select Committees are not getting any nearer to their knighthoods for saying that too loudly. The Select Committee gave a clear steer to the Government by saying that if they are to deliver anything like the aspirations that were set out in the White Paper, they need to be more hands-off. They must go through the Bill with a fine-toothed comb and remove those things that are unnecessarily prescriptive and meddlesome and are simply the residue of the institutional instinct to keep their hands on everything. 
 I hope that the Minister will be sympathetic to amendment No. 27. Characteristically, while he is smiling broadly, he is also shaking his head vigorously. 
 The Liberal Democrat amendment No. 55 has the same general thrust, but it would leave out only subsection (3)(c). It is, therefore, a subset of amendment No. 27 and I hope that the hon. Member for Kingston and Surbiton will agree with its broad thrust. We cannot disagree with the thrust of amendment No. 55 because it is contained within our amendment.

Edward Davey: The hon. Gentleman is correct. We will support his amendment. Although I am not trying to play a game of whose amendment was best, amendment No. 54, which we have already debated, would have gone even further than amendment No. 27. Amendment No. 55 is intended to give the Government another option to try to reduce the impact of regulation and it refers to the Government's keeping to themselves the power to make regulations. I am keen to speak to the hon. Gentleman's amendment, because it is good and because I think that he is challenging the Minister.
 The Minister and his colleagues recently published a paper called ''Freedoms and Flexibilities for Local Government'', in which they set out the new ideas that local authorities will have the regulatory burden removed and that they will not have to write so many strategies or reports for the Office of the Deputy Prime Minister and other Departments in Whitehall. The Bill goes in exactly the opposite direction, as it is littered with new powers for Ministers to make regulations. 
 The Minister must think again. If his actions are to be consistent with that recently published paper, he ought to restrict the amount of extra regulatory powers that he takes for himself. He may say in his defence that at the moment the regulations that he has given to the Committee are minimal and he is right about that. 
 I was pleasantly surprised when I read the regulations to see that they referred to having regard to the code produced by CIPFA and, to that extent, we cannot criticise the Minister. He has kept it as short as he possibly could. However, if he reads subsections (2) and (3), I think that he will readily agree that he is giving himself power—perhaps it is a reserve power, 
 nevertheless it is a power—to make detailed regulations. I cannot see the need for that. 
 The purpose of going down the route of a code was that it gives more flexibility. It allows the finance officers of local authorities to engage with CIPFA in an attempt to understand whether they are abiding by the code, because of the many nuances and subtleties in a capital regime. That is the best approach. All those powers need not be kept in the Bill, even on a reserve basis. Although the evidence before us is that the Minister is not intending to use the powers, it is up to us to look to what might lie ahead and to say no, we do not want those types of regulatory burden to be imposed on local authorities. 
 I shall speak briefly in favour of amendment No. 55, which is a little bait for the Government, if they do not accept the argument put forward by the hon. Member for Runnymede and Weybridge on amendment No. 27, which we support. Surely the Minister supports the deletion of subsection (3)(c). That measure is otiose; it goes over the top in what it would allow the Government to do and to set up in regulation. Even if we agree that the Government need a few reserve powers in regulation, which I do not, subsection (3)(c) is completely over the top. If the Minister is not prepared to accept amendment No. 27, I hope that he will at least consider amendment No. 55.

John Pugh: I seek clarification from the Minister about the clause. I have to go at 3.45 pm, so I will not be here to hear his clarification. However, I shall read his answers with assiduous care in Hansard.
 I accept that the Bill will place local authorities under a duty to produce a borrowing limit of some kind and to state it; I am not clear whether it is a ratio or a cash limit that they need to state, none the less they will have to state a limit and keep to it. If they wish to vary it, the regulations prescribe that they should hold a council meeting. Is there not a danger that the Bill may build in bureaucratic inflexibility by producing more council meetings than are necessary? At the moment, there are not many of them and members have little to do under the new cabinet system, but we do not want them to do unnecessary work. We want them to be prudent and we want all members of the council to be aware of the risk, but it seems to me that limits can be exceeded for a variety of reasons. 
 If the Government mismanage wholesale the country's economy, interest rates may have to go up dramatically, which might put a council on or over the limit. Under normal circumstances, the director of finance would suggest re-phasing of the capital programme and looking at slippage and so forth at the cabinet meeting or the policy resources meeting. He would not consider it necessary to hold a full-scale council meeting to make ordinary adjustments. I am concerned not so much about that scenario but about others that I am not sure are catered for. 
 The Minister has sensibly reserved himself the power to disapply some of the regulations, but I am not certain whether disapplication would work in 
 some of the following scenarios that I shall sketch out. I am referring to councils that wish to run major schemes, such as Manchester with the Commonwealth games and Sheffield with the student games. Clearly, they must put their exposure on such issues to their local electors and to the full council, but there are circumstances during the progress of contracts for such schemes in which their capital exposure will go up temporarily and they will be a relatively good business proposition for the council. The public good may be secured thereby, but temporarily the councils will edge over the limit if they are already close to it. 
 Of more immediate concern is how councils are expected to react to failed schemes in which the contractor goes bust and for a short time they are contractually exposed, perhaps to a considerable extent. I shall cite an example from my own experience. The contractor Christian and Nielsen went bust while conducting a major refurbishment of Southport pier, which is now happily complete. During that period, the council was financially exposed and had to cover for capital funds that were not provided through the contractor performing in the way that was expected. The cost of the job went up substantially when the contractor left the site. 
 Under those circumstances, what is a local authority to do? I do not think that my local authority would have gone over its prudential limit if it increased its capital limits, but a hypothetical authority might do so in such circumstances. What should it do? Should it de-commit to a major scheme, abandon other schemes or simply walk away from the job and see what happens? 
 In the case of Southport pier, the council required settlement on a bond, but that bond was only sorted out two or three years after the contractor went bust. In a sense, the council behaved prudently in accepting extra capital expenditure, and it performed a noticeably good public service. Under the old scheme, they would have had to ask the Minister for special capital approval. I am not certain whether current arrangements allow for that, so I should like the Minister to comment on the question. 
 How would the Minister react if a local authority approaching its prudential limits were faced with a proposition whereby the capital financing of a scheme would be considerably lessened by an up-front capital commitment from the local authority? I am familiar with such schemes, under which the contractor attempts to minimise his risks. Eventually, the capital risks of the local authority and the contractor may be diminished, and the cost of the project may come down. Would that be out of order, or would an authority have to make an application to the Minister in respect of such a scheme? 
 The key questions are how the idea of prudence will be interpreted, and whether, with the best will in the world, there might be circumstances in which, although a prudential limit is set, the public good may be served by varying it, albeit temporarily.

Nick Raynsford: It will not surprise the hon. Members for Runnymede and Weybridge and for
 Kingston and Surbiton that I do not intend to accept their amendments. The hon. Member for Runnymede and Weybridge commented on the fact that I shook my head while smiling. I hope he does not think that, like Iago, I intend to
''smile, and smile, and be a villain''.
 On the contrary, I intend to try to put in place an appropriate framework that ensures the necessary freeing-up of local government. As I shall explain to the hon. Member for Southport, that framework will give local government more responsibility and the ability to determine the outcome of problems such as the one that he identified, rather than make them dependent on ministerial decisions, as was the case in the past.

Paul Goodman: The Minister will find that he quoted Hamlet, not Iago.

Nick Raynsford: I am absolutely mortified. The hon. Gentleman is quite right. Having spent too much time in this place, I have become less familiar than I should be with the great works of our literary heritage. I can only apologise unreservedly for the mistake.
 Amendment No. 27 would narrow the Secretary of State's power under clause 3 to make regulations about the setting of the prudential limit. The amendment would allow the regulations only to specify a code of practice. Although we envisage that the regulations will, for the moment, serve only to name the CIPFA code—we all agree that that is the right way to proceed—we need to keep in reserve the power to impose some procedural requirements through regulations. I should say to the hon. Member for Runnymede and Weybridge that the provision is not a matter of excessive meddling, as I believe he described our proposals. The provisions under subsection (3) mainly relate to procedural arrangements—such as when, how and for how long an authority should make a determination—the monitoring of amounts determined under that subsection, and provision for the factors to which regard should be paid in making a determination. 
 On reflection, hon. Members will recognise that those are sensible, practical issues that may need to be covered in future. There may be a question mark over the length of time in which a prudential limit will apply, or questions may arise from an inquiry into what went wrong when a local authority got into difficulty. Findings from such an inquiry may lead us to the view that earlier warning signs may have helped to obviate the problem and that guidance for authorities would therefore be useful in the future. Only a curious Government would deny themselves the scope to issue regulations to cover those points. 
 We do not intend to exercise the powers in a heavy-handed way or to impose unnecessary burdens on local government. The Bill is an exercise in freeing-up local government. However, in doing something innovative, we want to ensure that it is a success and that we have the powers available to adjust the tiller as necessary as the process develops.

David Curry: In order to be consistent with Government policy, would the powers be a competence retained by the Secretary of State that he
 could disapply in the case of local authorities qualifying for the ''excellent'' epithet in the comprehensive performance assessment?

Nick Raynsford: The right hon. Gentleman makes an interesting suggestion. As he will know, as a result of that performance assessment, we have introduced a new framework—an innovations forum at which those authorities judged excellent by the Audit Commission will be invited to join the ODPM and other Departments to explore ways of carrying forward the Government's agenda of extending freedoms and flexibilities. The points made by the right hon. Gentleman should not be ruled off that agenda.
 We see the forum as a creative arena that will find ways in which local government can make better use of freedoms. We read with interest the advice offered by the right hon. Gentleman to his local authority and others in the pages of municipal publications. I am looking forward to reading the next one, for which he has given me a trailer.

David Curry: It is the last one and I will bring a cutting to the next sitting.

Nick Raynsford: I can only apologise for having missed it. I look forward to seeing the cutting. The right hon. Gentleman makes a fair point, and we will bear it in mind.

Philip Hammond: My right hon. Friend the Member for Skipton and Ripon (Mr. Curry) and the hon. Member for Southport both talked about the Minister disapplying regulations, but my reading of the clause is that the power to disapply relates only to limits made under clause 4(1) and that there is no general power to disapply. Therefore, however interesting the Minister finds my right hon. Friend's suggestion, he would not be able to go down that route even if he wanted to. Will the Minister clarify that point?

Nick Raynsford: The hon. Gentleman is quite right to say that the disapplication under clause 2(2) applies in respect of the national limit set under clause 4(1). However, the right hon. Member for Skipton and Ripon asked whether some of the procedural regulations made under clause 3(3) might not apply to local authorities judged to be excellent. I simply said that that could be usefully discussed by the innovations forum.
 The provisions are not intended to be detailed because we see them as a back-stop, although the power is necessary to enable us to guide the introduction of the new system. The point that the right hon. Gentleman made is, in principle, a valid one and we would not want to stand in its way.

Philip Hammond: Will the Minister confirm that, if amendment No. 27 were accepted or if the Minister made no regulations under subsections (2) and (3)—as appears to be the case—would it be open to a third party to apply to the court to determine that a local authority had not discharged its duty under subsection (1)? Could a councillor or council tax payer in that authority's area do that? Is regulation by the Secretary of State and the retention of reserved regulatory powers the only way in which we can be sure that local authorities will do what they are required to do by
 statute? Can we not rely on the same methodology that we use to ensure that every other party in the country does what it is required to do by statute?

Nick Raynsford: I hear what the hon. Gentleman says, but I am not sure that I would want to depend on the vagaries of judicial review to determine whether an authority had complied with the requirement to set a prudential limit in an appropriate way. I say that only because going to the High Court to challenge a local authority is a cumbersome process. For example, several authorities might take decisions on their prudential limits at a time when it was difficult to take account of all relevant factors, as shown by other authorities' experiences, when setting the prudential limit. In that situation, it would be better for the Government to use its regulatory framework to set a series of timetables under the provision in subsection (3)(a)(i), which deals with when an authority should make a determination, than to depend on the vagaries of whether a council tax payer or local business felt able to pursue a judicial review through the High Court.

Edward Davey: Just for the Committee's clarification, given that the Minister says that he does not intend to use regulatory powers to deal with several of the measures, will he describe how he expects CIPFA to develop its code? CIPFA will publish the final version later this year, but presumably it can be renewed and revised when experience suggests that that should be done. Surely that is the way to tackle the problems? Rather than assume that regulation must be used to change the framework, we should look to revising the code.

Nick Raynsford: I agree with the hon. Gentleman. We see the code as the first port of call; that is consistent with our approach. If CIPFA wishes to continue to perform the function—I have no reason to believe that it will not—and if the Government are happy with its work, as we have been so far, that could be the right way forward.
 A review of the code could be held in two years time, although that is hypothetical and we have no plans to do that. The timetable for that might mean that the revised code would not be issued for several months. It might be useful for the Government to use the regulatory powers if an issue that requires a response surfaces. I do not say that that will happen, but we have useful powers that will allow the tiller to be adjusted as the new regime comes into effect to ensure that it works smoothly and without problems.

Edward Davey: Surely if a particular issue comes up, a full revision of the whole code is not required. CIPFA could consider the issue and make a supplementary addition to the code, which would avoid the need for regulation.

Nick Raynsford: The code will be issued under regulation, so a revision to the code would require the same procedure. I am not sure that the hon. Gentleman's proposal has more benefit than a Government regulation. We think that the
 framework is the right way to introduce the new system smoothly and with safeguards.

David Curry: May I suggest that the right hon. Gentleman changes his metaphor? He is clearly not a sailor, because what one does to a tiller determines the direction in which one goes. He might prefer to trim his sails a little.

Nick Raynsford: As a former Conservative Minister, the right hon. Gentleman will know a lot about the trimming that is required. I have always understood that both sails and tiller are used to ensure that a ship remains on a proper and sensible course and is not diverted by squalls or short-term pressures from unexpected sources.
 In the same way as a former Prime Minister of the right hon. Gentleman's party criticised Baroness Thatcher by likening her economic policy to playing golf with a single golf club, I hope that he will accept that we should not depend on a single provision in introducing this new arrangement, but that a number of tools should be available to us to enable us to ensure its smooth implementation. 
Mr. Turner rose—

Nick Raynsford: I appear to have provoked the entire Opposition. I give way to the hon. Gentleman.

Andrew Turner: Will the right hon. Gentleman accept that that criticism was directed at my noble Friend Lord Lawson rather than my noble Friend Baroness Thatcher? The Minister is wrong about sailing, wrong about Shakespeare, wrong about golf, and wrong about Baroness Thatcher.

Nick Raynsford: I do not intend to be drawn into a discussion of how far Lord Lawson's economic policies were determined by the then Prime Minister, now Baroness Thatcher, but I think that I am right in saying that it was Sir Edward Heath who observed that the two of them were guilty of playing golf with only one club.

Philip Hammond: I am sorry to bring the Committee back from the high seas and the golf course to the matter in hand, but the Minister said—I was going to say a moment ago, but it is now a while since he said it—that as the CIPFA code was introduced by regulation, it would be appropriate for any amendment to that code to be introduced by regulation. Surely, that is incorrect, because regulation 2 states that a local authority should have regard to any current prudential code for capital finance that CIPFA might issue. I understand that to mean that if CIPFA revises its code, in the absence of a regulation de-specifying it, that code will automatically be incorporated.

Nick Raynsford: The hon. Gentleman may well be right. I will look further into the matter and give him a detailed response. However, my point was that if we wanted a change in the arrangements, that could be effected in a number of ways, and we believe that having regulatory powers to enable that to happen is the right way to go about things. That is why we are introducing under the clause regulations that do not simply allow us to use the CIPFA code. His
 amendment would bind us to using that code as the only way to make changes.

Philip Hammond: With respect, the Minister is wrong. The amendment would leave in place subsection (4), which gives the Secretary of State the power to specify one or more codes of practice. Therefore, the amendment would not simply leave everything dependent on the CIPFA code, but it would remove the regulatory powers under subsections (2) and (3).

Nick Raynsford: I accept that it is possible to have another code of practice as well as the CIPFA code, but there would not be the regulatory powers that are currently made available in clause 3 and that we believe are appropriate to enable adjustments to the tiller or sails—or whatever nautical metaphor the hon. Gentleman and his right hon. and hon. Friends might wish to employ—to ensure that the ship stays on course.

Philip Hammond: I am not even sure that the Minister is right about that because subsection (4) states:
''Regulations under subsection (2) may include provision requiring a local authority to have regard to one or more specified codes of practice, whether issued by the Secretary of State or another.''
 Would that not deal with those issues, if it were felt to be necessary to deal with them?

Nick Raynsford: I am becoming slightly confused by the hon. Gentleman's argument. On the one hand, it appears that he is arguing that it is undesirable for Government to have regulation-making powers, but he is now arguing that it is appropriate to have a range of different means of effecting change.
 The point that I have been making is that the current provision in clause 3 provides an appropriate framework that enables the Government to introduce—

Edward Davey: Will the Minister give way?

Nick Raynsford: I will give way in a moment, but the hon. Gentleman must bear with me while I respond to a previous intervention.
 Clause 3 allows the Government, through the regulatory regime, both to introduce the CIPFA code—and other codes that might be promulgated in the future—and to make the adjustments to which I have referred under the provisions of subsection (3). We honestly believe that that is the sensible way forward. There is no great gain in substituting one set of regulation-making powers for another. It may appear to the hon. Gentleman that the amendment would remove a regulation-making provision from the Bill, but in fact it would simply transfer it to another place. I hope that he accepts that to set up the scheme properly and sensibly we must be able to make adjustments in the light of circumstances and experience. We must ensure that the scheme and the regime can cope with unforeseen problems. The framework in clause 3 allows us to do that, and there is no great merit in removing specific powers only to rely on interpretations of other powers in the clause.

Edward Davey: We are getting to an interesting point. Is not there a distinction between codes and regulation? The codes, whether the CIPFA code or a code issued
 by another body or the Secretary of State, give local authorities guidance so that they can determine an affordable or prudential borrowing limit, having taken into account all the considerations. That is distinctly different from the regulatory approach, which says, ''You must do this or that''. For that reason, some of us prefer the prudential route, which the Minister promotes, to retaining the regulatory powers that the Government seek to hold in reserve.

Nick Raynsford: I believe that the hon. Gentleman has misinterpreted what I said and the provisions in the legislation. It is appropriate that certain provisions are in the Bill—for example, the requirement that the whole council should set a prudential limit—but to ensure the smooth operation of the system, procedural requirements should be specified by regulation. However, that is different from considering all the factors that need to be taken into account through the code, which we believe will be the right way of achieving that end.
 The purpose of clause 3 is to allow an orderly introduction of the scheme so that authorities can make decisions in an appropriate way, taking full account of the code or codes that may be introduced under the provision, and considering any additional requirements to do with, for example, timing of decisions. 
 I understand the hon. Gentleman's Liberal-Democrat predisposition to believe that the Government have control-freak instincts and want to control everything. However, he acknowledged only a few moments ago that he was pleasantly surprised by how non-prescriptive the draft regulations were and that they introduced the new arrangement in the best possible way. That is how we are trying to proceed. We have no wish to impose unnecessary regulations, but we do require the power to act if that is necessary to ensure that there is no ambiguity, confusion or potential for serious problems in the operation of the new system. The purpose of the measure is to provide a sensible back-stop, as we have done elsewhere in the Bill, to ensure that we can take the necessary corrective action if, for any reason, the new system appears to be on the wrong track.

Edward Davey: The Minister suggests that I misunderstood the clause. He says that subsections (2) and (3) are about process, whereas the code simply gives details about how the limit will be assessed. I would have expected the code to deal with process as well. There is no misunderstanding; it is just that the Liberal Democrats and, I believe, the Conservatives do not feel that the reserve regulatory powers are necessary. We want to get rid of them.

Nick Raynsford: I can only repeat to the hon. Gentleman that the provisions are a necessary safeguard. He conceded that they were not heavy-handed and I hope that he will accept that they will free up local government in a way that ensures that corrective action can be taken if need be.
 I do not want to go over ground that I have gone over already, but we were talking earlier about whether the prudential limit should be set by the whole council. Clearly, that could not be determined 
 by a code. We had thought that it could be done through regulations but, on reflection, we decided that it had to be done in the Bill. Borderline issues will arise, which is why the retention of the powers is necessary. 
 I want to respond to points raised by the hon. Member for Southport (Dr. Pugh) although, as he told us, he has had to leave. He spoke about the possibility of authorities getting into difficulty with major capital schemes, suggesting that they could be exposed to risks because of the nature of the schemes or because contractors went bankrupt. He gave the example of Southport pier—which, I am glad to say, is in a rather happier state than Brighton pier. That might have something to do with the performance of the contractor, but it is in any event a cause of relief to the good people of Southport. 
 In his absence, I say to the hon. Gentleman that the whole purpose of the new provisions is to ensure that local authorities take responsibility for their decisions. He described a council seeking a supplementary credit approval from the Government if it got into difficulty, but it is exactly because we want to get away from the unsatisfactory current provision that we are introducing the new prudential regime. In advance of major capital schemes, authorities will have to consider what reserves they have and how they would cope with cost overruns or contractors' bankruptcies. Rather than assume that all is for the best in the best of all possible worlds—which is a tendency of the Liberal Democrats—and then, when things go wrong, run to the Government saying, ''Please bail us out'', local authorities should act prudently and anticipate difficulties by making appropriate provisions. 
 I am sure that the Committee will have a useful debate about reserves, but I have no doubt that we will be accused of being unreasonable and heavy-handed by requiring authorities to make appropriate provisions for reserves. That will be another example of the distinction between those who believe in prudence and those who live in a never-never land—or the Liberal Democrats' Valhalla, as I have described it in previous sittings—where it is assumed that everything will go right and that someone else will do the bailing out when things go wrong. That is not sensible. I hope that hon. Members will acknowledge that the amendments are neither necessary nor desirable and will not press them to a Division. If they do, I hope that the Committee will reject them.

Philip Hammond: My hon. Friends are having a heated debate about the relative merits of the terms ''nirvana'' and ''Valhalla'' in describing the Liberal Democrats' paradise.
 The Minister is not having a terribly good day. It is only a month since I had to report him to the Minister for School Standards over his grammar. I would say that golf and sailing are clearly extra-curricular activities and do not fall within the right hon. Gentleman's remit, and I shall have to consider sending another letter to the Minister for School Standards about right hon. Gentleman's Shakespeare. 
 Standards are slipping on the Government Front Bench, Mr. Conway. Something must be done. [Laughter.] 
 The Minister referred to Liberal Democrats having a conspiracy theory about the Government's desire to maintain maximum control and maximum regulatory capability. He has certainly told us about the power in the Bill to make regulations, but he has published draft regulations that do not use that power, which suggests to us that the power is unnecessary and should be removed. I do not accuse him personally of having a passion for a maximum number of regulatory powers. I know how difficult it is for a Government to deregulate: it is easy to say, but difficult to do. The main reason why it is difficult is that behind the Minister stands a vast army—a vast structure—that is partial to regulatory power. What administrator, what bureaucrat, what part of the Government machine would not rather have more regulatory power? The measure by which we must judge the Government is their courage in taking on the machine and in fighting that battle within. We are seeing some of that inevitable tension in respect of the Bill and the process that led to it. 
 The Government set out a bold political statement when they said that they want to free up local authorities; then, they published the White Paper. The draft Bill, however, does everything but free up local authorities. Every bit of freedom that it grants, it snatches back three or fourfold in subsequent paragraphs. After a trouncing by the Labour-dominated Select Committee, the Government conceded ground in a few areas, but it is clear that for every inch that they concede to local authorities, they are snatching a yard. 
 I do not feel that the Government have addressed the issues on which we are focusing in amendment No. 27 and I urge my hon. Friends and other right-thinking Committee members to support us as we press it to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 10, Noes 12.

Question accordingly negatived. 
 Amendments made: No. 13, in 
clause 3, page 2, line 9, after '(1)', insert 'or (1A)'.
 No. 14, in 
clause 3, page 2, line 12, leave out 
 'a local authority is to make'.
 No. 15, in 
clause 3, page 2, line 13, at end insert 
 'or (1A) is to be made'.
 No. 16, in 
clause 3, page 2, line 14, leave out 
 'a local authority is to make'.
 No. 17, in 
clause 3, page 2, line 14, after 'determination', insert 'is to be made'.
 No. 18, in 
clause 3, page 2, line 17, after '(1)', insert 'or (1A)'.
 No. 19, in 
clause 3, page 2, line 19, after '(1)', insert 'or (1A)'.
 No. 20, in 
clause 3, page 2, line 21, leave out 'local authority' and insert 
 'person making a determination under subsection (1) or (1A)'.
 No. 21, in 
clause 3, page 2, line 23, at end insert— 
 '( ) A local authority's function under subsection (1) shall be discharged only by the authority. 
 ( ) Section 38(1) of the Greater London Authority Act 1999 (c.29) (delegation by Mayor) does not apply in relation to functions under subsection (1A).'.
 No. 22, in 
clause 3, page 2, line 23, at end insert— 
 '( ) In this section— 
 ''functional body'' has the same meaning as in the Greater London Authority Act 1999 (c.29); 
 ''local authority'' does not include the Greater London Authority or a functional body; 
 ''Mayor'' means Mayor of London.'.—[Mr. Raynsford.]
 Question proposed, That the clause, as amended, stand part of the Bill.

Philip Hammond: Where have we got to on clause 3? We have prudential limits being self-determined by local authorities, which is good. In subsections (2) and (3) we have the Secretary of State's powers to do that for them, which is bad. In subsection (4) we have a reference to the codes of practice and the ability to use third party codes of practice, which seems sensible. We would obviously have preferred amendment No. 27 to have been accepted, but we welcome the use of the CIPFA code of practice, which is a step in the right direction.
 I want to raise two specific points with the Minister on subsection (1). The hon. Member for Southport touched on the first point and I confess that it had not occurred to me, until he mentioned it—that it is possible to interpret subsection (1) as meaning not that a specific sum of money should be specified but that another limit on borrowing, for example—a multiple of anticipated revenue—should be used. I take it that it is the Minister's intention that borrowing limits must expressed as a specific sum, but if that is not the case, perhaps he would advise the Committee. If it is, perhaps he would confirm that he has received a proper opinion that the wording of the Bill will in fact require that the limit determined under subsection (1) is always determined as a fixed sum. 
 My second question, which my hon. Friend the Member for Isle of Wight touched on during an intervention, is whether the word ''afford'' is the right one in subsection (1), which states: 
''A local authority shall determine and keep under review how much money it can afford to borrow.''
 Affordability is, of course, one of the criteria to which a local authority should have regard. No authority should borrow more than it can afford to borrow. However, it may not always be sensible to borrow all the money that one can afford to borrow. To use an analogy with personal finances, we have all seen people who borrow the maximum amount of money they can afford to borrow and regret it later. My hon. Friend the Member for Isle of Wight was probably on the right track when he used the word ''prudent'' because we are really discussing a prudential limit, being the amount of money that it is prudent to borrow. That may not be the same as the amount that the authority could afford to borrow. An authority can afford to borrow as much debt as it can service from its revenue streams, but it might not be prudent to do so. 
 This is an important matter and I shall be interested to hear what the Minister has to say about the way in which the concept of affordability is to be interpreted in relation to subsection (1).

Edward Davey: I want to comment briefly on what we have just heard from the hon. Member for Runnymede and Weybridge and to confirm our view that clause (3) is unnecessary. Had we amended clause 2 properly, we would have kept to the CIPFA prudential code and we would not then have all these unnecessary elements in clause 3.
 The hon. Member for Runnymede and Weybridge referred to affordability and how it would be measured. I am not sure that I agree with him because if we define ''prudent'' we have to return to the numbers. The numbers will be central to assessing prudence or affordability and the draft code on which CIPFA is working refers primarily to numerical issues.

Philip Hammond: I am grateful to the hon. Gentleman because I should have given that example. It seems to me that—the Minister will tell me if his interpretation differs—using the term ''affordability'', if the cost of borrowing goes down, the amount of borrowing that can be afforded on a given revenue stream goes up. I hardly imagine it is the Minister's intention that if the cost of borrowing to local authorities were to fall from 4 per cent. to 3 per cent. they would have an immediate 33 or 25 per cent. or some other percentage increase in debt capacity.

Edward Davey: As I read the draft code, it takes account of those issues. The hon. Gentleman suggests that the code paints a static picture and that a council may look at its step position, tax base, expenditure and so on and say that it can afford things that year, but it will not look at the dynamics and the ranges it needs to keep within. My understanding of the code enables such analyses to be made, which is why I support the drafts before us. Most prudent people when looking at their mortgages and borrowing look at those aspects of affordability, taking a realistic and prudent view of
 what will happen to interest rates, but perhaps the hon. Gentleman does not.

Philip Hammond: With respect to the hon. Gentleman, we have seen precisely the opposite in people's personal borrowing. As interest rates have fallen, households have massively increased their borrowing to reflect the fact that borrowing is more affordable. The consequences are still to come home to roost, and may give rise to the kind of macroeconomic exigency about which the Minister speculates in the powers he is taking under clause 4(1).

Edward Davey: Mr. Conway, you will certainly rule me out of order if I am tempted to analyse the macroeconomic situation and how the low inflation climate has affected borrowing in the personal sector. I suggest that the hon. Gentleman reads the draft code and looks at some of the indicators that CIPFA suggests local authorities should consider. I do not think that such problems will arise. It is possible that in trying to follow the provisions local authorities may get it wrong; governments, local authorities and individuals can all get it wrong. The hon. Gentleman should know from looking at the Conservative record on managing public finances how badly governments can get it wrong—we saw debt double under the last Conservative Government.
 I accept that mistakes can be made about what is prudent and affordable. The question is what sort of framework one puts in place. I believe that the code is the right one and to the extent that clause 3 refers to the code and ensures it will be part of the framework, I support it.

Nick Raynsford: We had two interesting speeches from the Conservative and Liberal Democrat Opposition. If I heard correctly the view of the hon. Member for Runnymede and Weybridge, the balance sheet was to divide clause 3 as a sandwich into subsection (1), then the middle, which is subsections (2) and (3), and last, subsection (4). His verdict was: (1) good; (2) and (3) bad; and (4) good. Overall he gave a positive view, although he disliked the middle of the sandwich.
 I am not getting into a mathematical assessment because the hon. Gentleman might discover that the number of words in the middle section is greater than that in the two outer sections and come to a different view.

Paul Marsden: A simple question: where is the beef?

Nick Raynsford: The hon. Gentleman anticipated my answer. As usual, the beef is to be found in the middle of the sandwich. As we established earlier, although Opposition Members do not like it, we believe that there should be a little beef in the middle just in case it is necessary. We think that the sandwich is very good in any case, based on the two outer parts.
 Before I deal with the contribution from the hon. Member for Kingston and Surbiton, I shall pick up a couple of specific questions asked by the hon. Member for Runnymede and Weybridge. First, he asked 
 whether the borrowing limit must be determined as a sum of money. The answer is that the Bill's wording implies that, but the local authority should, in reaching its decision, take account of wider factors, such as the various ratios and indicators set out in the draft code. 
 Secondly, the question was asked whether the local authority was under any obligation to borrow the full amount. The inference was that once a borrowing limit had been set, an authority should borrow that amount. Of course, we do not take that view. The borrowing limit is the limit. We expect the authority to consider wider implications, not only how much it wants to borrow and the major capital schemes that it wants to pursue, but, crucially, what the risks are, what measure of reserve is necessary to take account of unforeseen circumstances and how much latitude there should be for the factors that the hon. Member for Kingston and Surbiton raised, such as potential changes in the economic scenario. 
 Just as any prudent home owner, when taking a decision on borrowing, would think not only about current mortgage rates, but about how they might change in future, so we expect an authority to form a view on the wider implications and not just to apply the borrowing limit mechanistically in the confident assumption that it will be able to service the debt in all circumstances. The borrowing limit is there to be interpreted by the local authority, and the interpretation should take account of other, potential circumstances.

Philip Hammond: The Minister is muddling two issues. Clearly, in entering into any borrowing, a prudent local authority will have regard to a range of circumstances. However, that is different from setting a borrowing limit, which may be far above anything that the authority contemplates borrowing. My question is whether affordability—in other words, its ability to service the debt—is the only criterion that it should use in setting the borrowing limit. It seems to me that it is not, but clause 3(1) specifically says that an authority shall
''determine and keep under review how much money it can afford to borrow.''

Nick Raynsford: The hon. Gentleman is right to say that the affordability issue determines the borrowing limit, but I was trying to deal with the question whether that would automatically lead through to borrowing up to that limit. I was making the point, which I am pleased he agrees with, that it should not. An authority should work within the limit and assess not only affordability issues, but wider issues, such as those that I mentioned.
 To put this in context, we should be aware that local authority borrowing is consistently falling, in just the same way as the Government have been successful in reducing the level of overall indebtedness of the country as a whole. We are working in a relatively benign framework, in which we have prudent management and falling debt levels. We can all take a great deal of satisfaction from that.

Philip Hammond: Does the Minister expect local authority borrowing to carry on falling in future?

Nick Raynsford: Here we have a wonderful paradox. The Conservative party accuses us of being the party of control and of determining what local authorities should do, but when we present local authorities with greater freedom and say, ''Over to you; it is now local government's decision,'' we are asked what we think they should do—

Andrew Turner: What they will do.

Nick Raynsford: Or what they will do. I shall resist that. The decisions will be taken by individual local authorities in different parts of the country in the light of local circumstances. That is the correct way forward, subject always to the national safeguard in clause 4. The Opposition parties do not like it, but it is the necessary corollary to the greater freedom that we offer.

Philip Hammond: There was nothing very difficult in what I asked the Minister. My understanding—if I am wrong, he will correct me—is that the Government's policy objective is to encourage local authorities to borrow. That is part of the purpose of changing the regime. It strikes me as rather odd that the Minister was explaining that we did not need to worry and that everything was fine because local authority borrowing was falling, if the Government's objective is in fact an increase in borrowing levels.

Nick Raynsford: The Government's objective is to ensure that local authorities can discharge their responsibilities and respond to the challenges of their areas and can invest, where appropriate and prudent, to improve the facilities and infrastructure of their communities. That is what we want. We want such decisions to be taken locally, although we believe that a national framework is needed, for the reasons that I have spelled out. That is why the clause 4 powers are included, but decisions taken under clauses 1, 2 and 3 should be reached by individual local authorities in the light of the prudential limit set and the guidance and regulations to which I have referred. That seems to us the right way forward, rather than the Government expressing a view on what the outcome should be.

Andrew Turner: The Minister has now misrepresented twice, although I am sure inadvertently, what my hon. Friend the Member for Runnymede and Weybridge has said. He did not say ''shall'' and ''should'', but ''would''. The Minister has used the word ''should'', but I think that ''would'' would be more appropriate.

Nick Raynsford: I made it clear in my earlier remarks that I expect that some authorities will increase their borrowing while others will reduce it. That is a perfectly natural part of the democratic and decision-making processes of individual authorities, which we want to encourage. I shall not give an overview of the whole position other than to say that we are keeping a prudent watch on it and have reserved powers that we could use if a sudden surge of borrowing took place that seriously endangered wider national macroeconomic stability. We do not anticipate that, but reserved powers are there, just in case.

Paul Marsden: Does the Minister not find it a little curious that the Conservatives now seem to be such dedicated followers of prudence? In the seven years
 before 1997, central Government debt more than doubled from £2,412 per head to £5,638 per head.

Nick Raynsford: The hon. Gentleman makes a very valid point. The Conservative party, during its later years in power, presided over an unfortunate mismanagement of the economy, which resulted in increased problems of debt and neglect of our infrastructure. Far too much of the national economy was allocated to dealing with the problems of failure rather than investing in future success. This Government have worked assiduously since 1997 to ensure that that is reversed. We have seen important reductions in overall debt, substantial investment in our infrastructure and improvements in social programmes to make the maximum use of all our citizens' talents. That is the way forward and the distinction between our parties.

Philip Hammond: That is guff. I am sure that the Minister recognises that there are points in an economic cycle at which more borrowing is necessary. I hope that he recognises that, or he will be in trouble with some of his right hon. and hon. Friends.

Nick Raynsford: I entirely agree that there are moments in the economic cycle at which it is important to increase borrowing. The hon. Gentleman will recognise that, at a time when the world economy is going through considerable difficulty and turbulence, the fact that the UK is in a strong position is in no small measure due to the prudence of my right hon. Friend the Chancellor's financial management and our increased investment, now coming through, which has the counter-cyclical effect of keeping our economy in a strong position. I am delighted to see that wisdom is at last reaching the Opposition Benches and look forward to discussing that further with the hon. Gentleman in due course.
 Question put and agreed to. 
 Clause 3, as amended, ordered to stand part of the Bill.

Clause 4 - Imposition of borrowing limits

Philip Hammond: I beg to move amendment No. 6, in
clause 4, page 2, line 26, after 'the', insert 'aggregate level of'.

Derek Conway: With this it will be convenient to discuss the following:
 Amendment No. 28, in 
clause 4, page 2, line 26, at end add 
 'and the allocation of a share in such aggregate limits to individual local authorities.'.
 Amendment No. 7, in 
clause 4, page 2, leave out from beginning of line 27 to end of line 2 on page 3 and insert— 
 '(2) No regulations may be made under this section unless— 
 (a) the Secretary of State has consulted such representatives of local government as appear to him to be appropriate; 
 (b) he has laid before each House of Parliament a report explaining the reasons why he considers it necessary that the regulations be made; and 
 (c) the report has been approved by resolutions of each House of Parliament. 
 (3) Sections 117(1) and (2) do not apply to regulations made under this section.'
 Amendment No. 49, in 
clause 4, page 2, line 27, leave out subsection (2).
 Amendment No. 29, in 
clause 4, page 2, line 28, leave out from 'authority' to end of line 29 and insert— 
 'where he considers that the local authority has not, in setting a borrowing limit under section 3(1), had proper regard to the requirements of section 3(2).'.
 Amendment No. 31, in 
clause 4, page 2, line 31, at end insert— 
 '( ) A limit set under subsection (1) or (2) may not, in respect of any local authority, be set a a level less than the level of that local authority's borrowing on the date that the draft regulation is laid.'.

Philip Hammond: Clause 4 is one of the most controversial clauses. It is one on which the Select Committee had something to say. In its original form, the draft Bill did not refer to the national economic reasons in subsection (1), which appeared as an additional power for the Secretary of State to set limits on local authorities.
 In his evidence to the Select Committee, the Minister asserted the Government's need to be able to impose additional national limits in a macroeconomic crisis. It is good that the Government are focused on the economic cycle and the gathering storm clouds. A macroeconomic crisis may hit us at some stage. That is in marked contrast to what we heard from the Chancellor, until recently. He has not talked about the end of the business cycle in the past six or eight months. Certainly, during his first four or five years in office, he believed the business cycle had ended. 
 The Minister said that those powers might be necessary. As a sop to the Select Committee, he inserted into subsection (1) the phrase ''for national economic reasons'', which says nothing concrete. Perhaps the Chancellor's technical adviser could think of a more technical term than ''national economic reasons''. There is no test for their measurement and thus no basis on which to challenge the Government's assertion that they exist. 
 I am proud to claim no authorship of amendment No. 7, the substantive one in this group. It is the recommended, alternative version of clause 4 suggested by the Select Committee during the pre-legislative scrutiny process and it has considerable appeal.

Robert Syms: Portugal, Germany and France have difficulty with the 3 per cent. deficit. In future, if the Government get their way and we become part of the eurozone, the 3 per cent. limit might restrict local authorities' ability to borrow. The Government would have to suppress the borrowing level to live within those limits.

Philip Hammond: My hon. Friend raises a very interesting point. I had not thought of those
 provisions in terms of the possibility that one day the Government might have to enforce the growth and stability pact in the UK to make local authorities and local council tax payers pay for any euro adventure that they might undertake. My hon. Friend has obviously thought carefully about these issues.
 The substantive amendment of the group, amendment No. 7, provides, first, that in very extreme circumstances—a macroeconomic crisis—the Minister would have to consult with local government before taking action. I would be very surprised if he said anything other than it would be inconceivable for the Secretary of State to take such action without consulting local government. The Select Committee believed that the provision should be on the face of the Bill. The fact that the Select Committee has recommended it certainly recommends it to us. 
 Secondly, the amendment provides for the Government to report to Parliament to explain the macroeconomic reasons that gave rise to the need to limit local authority borrowing. 
 Thirdly, there should be an affirmative resolution of both Houses to approve the order that imposed the new limits on local authorities. The procedure is used in an extreme macroeconomic crisis only, such as the Labour Chancellor turning his car around on the way to Heathrow airport and being hauled back to see the International Monetary Fund in Downing street, if the IMF were ever to visit us again. 
 Amendment No. 7 would also eliminate subsection (2) and take away from the Secretary of State the power to set individual borrowing limits on local authorities for reasons other than national economic emergency. In our previous discussions we have already probed the need for subsection (2) and the Minister has addressed those issues. 
 Subsection (2) implies that the Government see the freedoms given to local authorities as licensed. Authorities will be allowed to police themselves as long as the Government have the power to slap them down if they do something that the Government do not like. I suspect that that is the reasoning of the Select Committee in seeking to eliminate subsection (2). That would remove any possibility of discrimination between authorities, or classes of authorities. 
 Amendment No. 6 would clarify that local authorities' aggregate borrowing is the target of clause 4(1). Only aggregate borrowing is relevant to macro-economic management in this case, so the amendment would make that explicit. Amendment No. 28, by introducing additional words at the end of subsection (1), deals with the question of allocating that aggregate borrowing limit between different authorities. 
 There will be concerns about how the Minister would use his power in such situations to allocate borrowing limits to authorities. Would those who had been prudent be penalised, and those who had been profligate rewarded? Would authorities that were doing things that the Government happened to like 
 be treated better than others, or would there be some mechanical allocation of the overall aggregate limit to individual authorities, perhaps a standard fraction of their clause 3(1) borrowing limits? It would be helpful if the Minister explained what he has in mind. 
 There are no regulations under the clause at present, and there will not be any until there is a macro-economic crisis to deal with, but I hope that the Minister has thought about the question of sharing the pain between authorities. We need an aggregate limit, because in an economic crisis the markets will be looking for one. We need to know how the individual limits will be determined. 
 I shall leave subsection (2) for the Liberal Democrats to deal with under amendment No. 49. I should like to quote the Select Committee report to the Minister. The hon. Member for Kingston and Surbiton has already quoted Mr. Travers saying: 
''The same legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''
 The Minister should take that concern on board. The Local Government Association told the Select Committee that clause 4 would give the Secretary of State a power to impose a borrowing limit on an individual authority, irrespective of whether the power to set a national limit is retained. The power is unnecessary, given that the authority will have to comply with CIPFA prudential code when it determines its borrowing needs. The provision should be removed. 
 Amendment No. 29 addresses that issue. The Local Government Association suggested that the power to impose individual limits on authorities should be removed, other than as part of an aggregate macro-economic national emergency limit. As ever, in the spirit of compromise and the search for consensus, the amendment would leave in the power but qualify it to make it clear that the Secretary of State can act only under clause 4(2) where he believes that a local authority has failed to have proper regard to the codes when determining its borrowing limit under clause 3(1). 
 I have tried to tempt the Minister down that path before, and would like a clear answer from him. Is that the circumstance in which the powers under clause 4(2) would be used? If he cannot accept that limitation on the Secretary of State's powers, will he say in which other circumstances should an authority that complies with the requirements under clause 3(1) and has proper regard to the codes of practice specified by the Secretary of State be hauled up before the beak and subjected to a special sentence issued by the Secretary of State? It is not apparent how any such circumstances would arise in peacetime. Moreover, in the extraordinary circumstances of a national economic emergency, the Minister already has powers under clause 4(1). 
 When we discussed the subject earlier, the Minister drew a comparison based on the current regime of capital approvals, and said that local authorities might find ways of avoiding those approvals, which was why we needed these wide-ranging powers. I suggest to the 
 Minister that a regime based on a code of practice that reinforces standard accounting practices is not susceptible to avoidance in the same way as a prescriptive regime of capital approvals might be. The power in its unqualified form is wholly unnecessary, and is merely an example of the instinct to keep hold of reserve powers and not to let go. 
 Amendment No. 31 is simply a pragmatic amendment. I hope that the Minister will say that he accepts it or that he will give the Committee some other reassurance that its intended effect will be incorporated into any regulations that are issued in future. The amendment would require that the level set for any authority should never be below that authority's existing level of debt. It is surely not the intention that an authority could be put in breach of its statutory obligations at the stroke of a ministerial pen by the setting of a level that was below the authority's existing level of debt. That returns us to the question of allocating the pain between authorities, certainly when there are national economic reasons. 
 If the Minister were to accept my argument, authorities that have been prudent and have low levels of borrowing relative to their borrowing limits would have to take more of the hit to achieve a given macro-economic effect, because authorities that are close to their borrowing limits cannot, in practice, have their borrowing limits cut. That relates to my main concerns about the direction in which the clause is going on the allocation of any limits that are set in aggregate to individual authorities and how the Government might go about setting limits for individual authorities under subsection (2), when those authorities are fully compliant with their obligations under clause 3(1).

Edward Davey: The hon. Member for Runnymede and Weybridge is right to say that the clause is very important. There are two key issues. First, under what economic circumstances should we be happy for central Government suddenly to control the aggregate of local authority expenditure? That is the first big issue. The second big issue is whether we should allow the Secretary of State, outside of any economic crisis, to intervene to cap the borrowing of any individual authority.
 On the first issue of national economic circumstances, we have two bites at the cherry. In this group of amendments we have amendment No. 7, which, as the hon. Member for Runnymede and Weybridge said, borrows from the Select Committee report. In the next group of amendments we have new clause 2, which I will talk about when we reach the clause stand part debate. 
 I will now touch on the general issue in relation to amendment No. 7, which takes the admirable approach recommended by the Select Committee. It does not set out the type of economic tests that need to be considered. I would prefer it to do so, which is why I tabled new clause 2. However, the amendment allows each House of Parliament to consider properly the information on which the Government are making their decision. That is the right approach. The Minister has said, and it is in the explanatory notes, that this is very much a last ditch power that the Government 
 hope not to have to use. The fact that it is such a huge power means that it should be used only if it is accompanied not just by the issuing of regulations, but by a proper process whereby the information on which the Secretary of State is basing the use of the power is laid before Parliament and a debate ensues. The Liberal Democrats will certainly support amendment No. 7, and I hope that the hon. Member for Runnymede and Weybridge intends to put it to a vote. It is particularly important to vote on it because it comes from the Select Committee's report. There may well be Labour Members who, having read that report, wish to support amendment No. 7. 
 I will say more about national economic issues when we reach the next group of amendments. I want to deal in greater detail with amendment No. 49, which would delete subsection (2) entirely. The Liberal Democrats think that the powers that the Secretary of State wants to have to interfere and cap the borrowing powers of local authorities are completely over the top. When one considers the Bill and other legislation, one realises that there are enough controls. Indeed, there is a huge range of controls to ensure that local authorities do not misuse their powers. If we listen to the Select Committee, we can be in no doubt about that. 
 Under the Bill, we will have the prudential system and the CIPFA code, which, as we have heard, can be revised and reviewed in the light of experience. The CIPFA code will be a powerful tool and will judge the affordability of each local authority's expenditure. I have had reason to refer to the code during today's proceedings. I ask hon. Members who are in any doubt about what the hon. Member for Runnymede and Weybridge and I are asserting to read the draft code. There are huge numbers of guidelines and proposals, which, if a local authority were abiding by them, would ensure that there would be no danger of a local authority misusing its borrowing power. The code is therefore at the heart of the system. 
 Secondly, we have just passed clause 3(1), which will make it illegal for a local authority to breach the affordable borrowing limit set by the code. Such a safeguard is already in place and there are other safeguards, which we have already mentioned. I will not repeat those safeguards in detail, but they are in sections 32 and 33 of the Local Government Finance Act 1992. Section 76 of the Local Government and Housing Act 1989 deals with housing debt, and my hon. Friend the Member for Southport has talked about statutory duties on local authority finance officers. 
 Then there is the electoral test. If a local authority tries to raise its council tax too high, the local electorate can throw it out. There is a range of financial, legal and political tests, but the Government want another power. It is not surprising that the Select Committee, the LGA and the Local Government Information Unit, which is again an all-party group, said that subsection (2) should not be in the Bill. 
 When the Government replied to the Select Committee's report, which suggested deleting clause 4(2), they said: 
''It could be necessary, in exceptional cases, to protect local taxpayers from the consequences of irresponsible borrowing by their authorities.''
 The response does not refer to the other controls, which I have listed, but the Government apparently still need an extra power. It is a reserve capping power and we should be under no illusions about it. 
 Interestingly, the response shows that the Government were not sure on the issue in November 2002, when they said: 
''The power must be retained in the Bill, but the Government is again considering whether the clause could be amended to express the White Paper policy intention without undermining the safeguard it provides.''
 In other words, they were stung by the Select Committee's criticism and the way in which representatives of local government, particularly the LGA, had looked at the draft Bill and said, ''You do not need these reserve powers.'' It appears that they have looked at the matter again and have decided to make no changes. I deeply regret that, and Government Members should also regret that. When their colleagues considered the power, they said that it should go. It is widely judged to be unnecessary, and I urge the Minister to say that he is relaxed about the deletion of subsection (2). 
 I do not want to talk in detail about the other Conservative amendments in this grouping, except to say that they are worthy. I look forward to the Minister's trying to defend his position and persuade the Committee that we should not support the amendments. 
Several hon. Members rose—

Derek Conway: Order. Before I call another hon. Member, I make it clear to the Committee that we shall debate the content of new clause 2, which of course relates to the matter in hand, when we come to the clause 4 stand part debate. If any hon. Member wants to call a Division on an amendment in this group other than amendment No. 6, they should indicate their wish to the Clerk during the debate and I will call it accordingly.

Andrew Turner: There was a certain circularity about the argument made by the hon. Member for Kingston and Surbiton. He said that if the local authorities were complying with the code of practice, they were not acting improperly. The point is that the code of practice is designed to define whether they are acting improperly. For one moment, let us put ourselves in the Government's position—in the hope that we can put ourselves in that position for longer at some point in the future. From time to time, Governments have to deal with situations such as that in Hackney. They may have to deal—I hope not—with a national economic disaster. However, that is the only extent to which I am prepared to put myself in the Minister's shoes. If the Government end up with a national economic disaster of the kind that they do not anticipate but are making ample provision for, they should take the necessary powers to control local
 authorities then, rather than preparing for it as they are doing in the four clauses that we have debated so far.
 I cannot believe that Ministers think that a national economic disaster will creep up on them so unobserved that they will not have time to take the legislative and other powers that are necessary to address local authority borrowing, but that their officials will have time to work out a scheme that can be introduced by regulation and contain derogations for local authorities that may or may not be Labour-controlled and whose borrowing may be prudent in the round but not in the context of a national economic disaster. 
 My great concern is that the Government feel that it is essential to include the powers in the Bill. Why do they not plan to deal with a national economic disaster when it is imminent rather than take the powers now? Once a Government of any political persuasion are armed with such powers, those powers are easily abused. If we give such powers, Governments will always find an excuse to use them. If we withhold them, they will have to ask Parliament for the powers when the time is appropriate.

Robert Syms: I will speak along similar lines. Clause 4 refers to national economic reasons, and from the code of practice produced by CIPFA, it seems that most indicators are annual. Most would be done at the time of the annual budget, and, as is stated in the code, one would revise one's estimates after 12 months before drawing up the performance indicators for the forthcoming year. Only a small part of the code refers to the finance officers reporting whether anything has varied during the year. I agree with my hon. Friend the Member for Isle of Wight that we are likely to get accurate figures and to be able to impose a degree of control only at the end of a financial year, so I am not sure whether the provision is needed in the Bill. In the event of some crisis, I am sure that the Government would legislate immediately to deal with higher expenditure, as well as other emergency legislation that does not focus on this aspect of the Bill.
 I also agree with my hon. Friend the Member for Runnymede and Weybridge that there would be a tremendous temptation for a Government to use the reserve power. To include provisions in legislation on the assumption that we will have an economic crisis is unnecessary, as the House of Commons can quickly and effectively deal with an emergency. One benefit of the first-past-the-post system, which means that we usually have a majority Government, is that we can govern during emergencies to sort things out. I do not believe that the powers need to be in the Bill, and I await further justification from the Minister.

Nick Raynsford: This complex group of amendments relates to clause 4, which enables the Secretary of State to impose national or local borrowing limits. That crucial reserve power provides important safeguards, and I do not intend to repeat the arguments that we have already heard. The hon. Member for Isle of Wight accepted the argument in the case of national need but not local need, while the Liberal Democrats are opposed to imposing any restriction on local
 authorities, so I understand that there are different points of view. I wish to explain why we regard the amendments as unhelpful, unnecessary or, in some cases, undesirable and why we believe that the arrangements in the Bill are the right way to extend freedom to local government within that prudential regime, which will ensure proper financial responsibility in decision making.
 Clause 4(1) enables the Secretary of State to limit local authority borrowing if it seems likely to exceed the level that is nationally sustainable. Clause 4(2) enables the Secretary of State to impose a limit on an individual authority to stop it borrowing unaffordably. Amendments Nos. 6 and 28 must be taken together and would change clause 4(1). It would then refer to the setting up of an aggregate limit for local authority borrowing and each authority's share in that aggregate limit. In our view, that is not necessary. Before I explain why, I wish to say that we envisage using the power only as a backstop. We have no intention of using it except in extreme circumstances, so we do not have detailed arrangements worked out. 
 In response to the hon. Member for Runnymede and Weybridge, I wish to make it clear that we will consult local government before using such powers. Although we have no detailed plans for implementation, whatever formula we use, it will be calculated to produce the right aggregate result nationally. That is implicit in the obligation to take account of the national economic situation when setting a limit under clause 4(1). I am satisfied that the idea of an aggregate limit and the authorities' share in that aggregate limit is already implicit in the clause. The amendment adds nothing to the Bill and would not improve clarity. 
 Amendment No. 7 partly reflects the recommendations in paragraph 14 of the report of the Select Committee—the hon. Member for Runnymede and Weybridge emphasised the fact that he had not drafted it. I was aware that it was a piece of blatant plagiarism on his part, but fair enough, he has chosen to lift the suggestion from the Select Committee.

Philip Hammond: I have to intervene because there is clearly a pejorative implication in what the Minister has just said. Does he think that when Select Committees scrutinise a Bill under the pre-legislative scrutiny procedure and recommend a change to it and the Government do not implement that change, it is incumbent on the official Opposition to pick up that proposed change and test the Minister's reasons for rejecting the recommendation?

Nick Raynsford: I do not believe that such action is incumbent on the Opposition. It is proper for the Opposition to take it, but it is equally proper for the Government to consider recommendations from a Select Committee, to agree those that they think sensible and soundly based, and to reject those that they do not consider justified. That is exactly what we have done. We were happy to accept the Committee's suggestion that it should be made clear that national economic reasons were the motive for the provisions in clause 4(1).
 We also made a change to clause 4(2) to make it clear that it would be used to prevent unaffordable borrowing. We did that in response to consultation. There should not be a statutory requirement for parliamentary approval before setting a national limit. Any such limit would inevitably have been subject to parliamentary debate and indeed scrutiny, but the limit would need to be imposed quickly due to the economic requirements. A lengthy inquiry could well be counter-productive.

Edward Davey: Will the Minister explain to the Committee the procedure by which Parliament has already considered that expenditure?

Nick Raynsford: Parliament considers the estimates of the Government's expenditure, as most hon. Members are aware. There is no need for a statutory instrument to consult local government. We make many important decisions affecting local authorities and always undertake proper consultation in accordance with well-established agreements between central and local government. We have already given clear commitments to local government representatives that they would be fully consulted about any need to set a national borrowing limit.
 Amendment No. 7 would also eliminate the important flexibility conferred by subsections (4) to (6), which would allow authorities to transfer borrowing headroom between themselves under a national limit without Government consent. They make no difference to the total effect at national level and would ensure that borrowing capacity was distributed efficiently and not wasted. The provisions also help to underline the fact that the clause 4(1) power is directed only at protecting the national economy. I am surprised that the amendments tabled by Conservative Members would eliminate the helpful headroom that would allow the proper implementation of the arrangements. 
 Amendment No. 7 also seeks to disapply clause 117 when regulations on a national limit are made. It allows different provision to be made for different descriptions of authorities. Such flexibility could be important in spreading the impact of a national limit fairly between authorities, so the amendment would not be helpful or appropriate. 
 Amendments Nos. 29 and 49 relate to subsection (2), which allows the Secretary of State to impose limits on individual authorities to prevent locally unaffordable borrowing. Amendment No. 29 is unnecessary; it would make the power in subsection (2) explicitly dependent on disregard of regulations under clause 3(2), but that is the practical effect of clause 4 as drafted. We would consider imposing a limit on an authority if it was seriously failing to observe the requirements of the prudential code specified by regulations under clause 3(2). Clause 4(2) is far more transparent and makes it clear that the ultimate policy is to prevent imprudent borrowing. I have already emphasised that that provision was included in the Bill in response to consultation, instead of a simple failure 
 to follow a code, as it is better to make it clear that the objective is to avoid imprudent borrowing.

Philip Hammond: The amendments must be read together. The intention of amendment No. 29 is clear not from considering clause 3(2) as drafted but as it would be post-amendment No. 7, which is effectively the power in clause 3(4) as drafted. I hope that I am making myself clear.

Nick Raynsford: The hon. Gentleman is, but for the reasons that I have already explained, amendment No. 7 has a series of undesirable consequences in that it removes the necessary flexibility, for example on headroom. We would not, in any circumstances, accept it. Amendment No. 29 would have the impact that I described; it is less satisfactory than the wording in clause 4(2) as drafted.
 Amendment No. 49 would remove the entire provision, which is a typical Liberal Democrat view of the world, based on never-never land where bad things never happen. Sadly, in the real world, bad things do sometimes happen. Local authorities get into difficulty; some are badly run and need intervention or help to turn things round.

Paul Marsden: Will the Minister give way?

Nick Raynsford: I will in a moment, but I want to respond to the points made by the hon. Member for Kingston and Surbiton.
 There is a need for a new and mature relationship between central and local government based on a recognition that things can go wrong. It is important to take preventive action to stop situations deteriorating and corrective action to deal with problems when they arise and that is what our policy is designed to achieve. It has been bitterly opposed by the Liberal Democrats, and by many Conservatives, but the introduction of the comprehensive performance assessment and corporate governance inspections by the Audit Commission have helped to identify weaknesses and to take effective preventive action in advance of serious problems arising. 
 In several authorities we have seen the positive consequence of early intervention to turn authorities round; sadly, we have also seen the consequences of allowing a situation to continue year after year without effective action. The problems confronted by areas such as Hackney and Walsall are a sad comment on the lack of a mature relationship between central and local government and an understanding of the need to take effective action against failure. That is our objective and purpose, based on the real world. When real problems come to light, it is better for the Government to build a proper relationship with local government than to take heavy-handed action too late. 
 I hope that the Liberal Democrats will recognise that the powers are a necessary safeguard, which we do not intend to use except in circumstances that are so serious that no realistic alternative is possible. That was what I said in evidence to the Select Committee and I made the same comment to local government as I do to this Committee. It would be irresponsible to remove the Government's ability to take action to prevent a serious deterioration in an already 
 unsatisfactory state of affairs in a local authority. We are building a good, new relationship with local government, based on responsibility and a shared concern to tackle and turn around the relatively small number of authorities in real difficulty whose failures, sadly, give the whole of local government a bad name. It is in all our interests to ensure that we succeed. I wholly reject the unrealistic thinking behind the attempt to remove clause 4(2).

Paul Marsden: Will the Minister cast his mind back to 1997? I agree that Ministers may require some reserve powers to deal with rogue councils. However, in 1997, before the general election, Labour's position on local government was that:
''The government has taken such massive central control over local government that civil servants in Whitehall now effectively set the budget for every single council in the country. We do not think this is right or sensible. It assumes that civil servants in Whitehall know the needs and circumstances of each area better than councillors elected by local people.''
 Should not the Minister be trusting local councillors and local people? He is the one living in cloud cuckoo land.

Nick Raynsford: The hon. Gentleman is wrong. We have substantially increased the freedom of local government. We ended the restrictive capping regime that we inherited, we have increased grants to local government over the past six years by 25 per cent. in real terms, and we have removed a series of obligations and repressive measures that had been imposed on local government by central Government. In parallel, however, we have also said that we want a mature, new relationship with local government based on a commitment to deliver high-quality services locally and to maintain standards of community leadership
 that every citizen has a right to expect from a local authority. That is the thrust of our White Paper. It is a deregulatory measure, but it also requires acceptance of the need for responsibility on all sides. We are proud to introduce it.
 Amendment No. 31 is designed to introduce the condition that no borrowing limit may be imposed on a local authority below its actual level of borrowing. I have to tell the hon. Member for Runnymede and Weybridge that it is unnecessary. If an absolute figure were ever set for an authority below its present level, nothing would be achieved. The borrowing control is set out in clause 2(2), according to which an authority 
''may not borrow money if doing so would result in a breach of . . . any limit for the time being applicable''.
 Unless a loan breaches the limit when it is actually taken out, nothing can later make it unlawful. No element of retrospection applies, so the amendment is unnecessary and I hope that the hon. Gentleman will withdraw it. 
 Before I finish, I shall respond quickly to the hon. Members for Isle of Wight and for Poole, who spoke about powers to deal with national economic circumstances. The hon. Member for Poole argued that they were unnecessary and the hon. Member for Isle of Wight thought that they might be necessary, but wanted to know why the Government wanted them. The answer is a single word—prudence. 
 Further consideration adjourned.—[Mr. Woolas.] 
 Adjourned accordingly at nine minutes past Five o'clock till Tuesday 28 January at five minutes to Nine o'clock.